Worldwide money manager assets hit $68 trillion

Total assets under management of the largest 500 money managers worldwide jumped 8.2% to $68 trillion in 2012, with U.S.-based managers controlling the largest market share in a decade, according to the Pensions & Investments/Towers Watson World 500 ranking.

Unlike the previous year, when total assets of the top 500 managers dropped 2.5%, the main factor behind 2012's advance was outperformance of equities over bonds — a key trend that has continued in 2013. However, aggregate assets under management remained below the previous peak of $69.4 trillion recorded at the end of 2007.

“Overall, the relative positions of managers would have been determined by whether the managers were heavily invested in equities as opposed to government bonds,” said Craig Baker, global head of research at Towers Watson & Co., Reigate, England.

So far this year, “performance has been more or less a continuation of 2012,” Mr. Baker said. “Bonds look less good, but not awful, although there has been a bit more volatility in bonds.”

The Russell 3000 index added 16.4% for the year ended Dec. 31, 2012, and 21.3% in the first nine months of this year. The MSCI All Country World index returned 16.1% in 2012 and 14.4% through Sept. 30 this year. However, the Barclays Capital Global Aggregate bond index gained 4.3% last year but lost 2.2% in the first three quarters of 2013.

The most important determinant in asset growth for the next several years will be “what happens to bond yields, because a lot of the managers have got a lot in bonds, and a lot in government bonds,” Mr. Baker said.

In first and second place on the list, respectively, BlackRock Inc. and Allianz Group are prime examples. “If yields do revert and go up considerably, then those guys are going to suffer more,” Mr. Baker said. “Of course they're so big that they may well stay at the top, but their numbers are going to come down a fair bit.”

As a result of the outlook for bonds, efforts to diversify their businesses have been at the forefront among many of the leading managers, sources said. BlackRock, the world's largest manager, grew 7.9% to $3.79 trillion in AUM at year-end 2012 and topped the $4 trillion mark earlier this year. “A lot of (client) focus has been on multiasset solutions and alternatives,” said Edwin N. Conway, New York-based managing director and head of BlackRock's institutional group in the U.S. and Canada.

“Fixed income still has a very important role within an investment portfolio, we just believe that the old ways of doing it has to change,” Mr. Conway added. “For clients, targeting returns that look beyond traditional sources is what's needed right now. The rotation we're seeing is not out of fixed income, but within fixed income.”

According to BlackRock's 2012 annual report, long-term net inflows into alternative strategies totaled $109.8 billion, while $79.8 billion was added to the firm's global allocation fund in 2012. Demand also has risen for multiasset alternative strategies, which often comingle various liquid and illiquid alternative investments within separate accounts, said Mr. Conway, who is also global head of BlackRock's alternative investment strategy group.

Allianz Group, the parent company of Pacific Investment Management Co. LLC and Allianz Global Investors, added 15.6% in AUM totaling $2.45 trillion at the end of 2012.

Vanguard Group Inc. passed State Street Global Advisors to claim third place after surpassing Fidelity Investments the previous year. In 2012, Vanguard's AUM rose nearly 20% totaling $2.22 trillion. SSgA, whose AUM rose 12.4%, dropped to fourth place with $2.09 trillion in 2012. Fidelity remains in fifth place with $1.89 trillion, a 10% increase from the previous year.

In the past five years alone, Vanguard's AUM has grown about $1 trillion, “about half of which resulted from market appreciation and the other half by net cash flows,” said Chris McIsaac, managing director of the institutional investor group at Vanguard, Malvern, Pa.

Growth has been a result of the general trend toward passive investing and specifically through four major distribution channels, Mr. McIsaac said. Demand from U.S. investors who are directly buying the firm's offerings has helped to spur growth. Second, “defined contribution retirement plans have embraced indexing and target-date funds, two product categories in which Vanguard maintains a leading position,” he added.

Thirdly, the firm is increasingly working with financial advisers and other intermediaries, whose product of choice seems to be exchange-traded funds, Mr. McIsaac said. The fourth source of strong inflows is its international business.

Size mattered again in 2012 as the top 20 managers outpaced their peers in the top 500, adding 15.9% in AUM during 2012 and widening their market share to 41.4% of total assets from 38.7% the previous year. However, a portion of that increase came from a change in research methodology that also put both AXA Group and Deutsche Bank AG's asset management businesses in the top 10 with $1.47 trillion and $1.25 trillion in AUM, respectively.

“A major factor was that passive (strategies) increased faster” than the overall aggregate AUM of the top 500 managers, Mr. Baker said, referring to the 12.3% increase in passive assets during 2012 compared with a 1.4% reduction the previous year. Larger players tended to dominate in passive management, particularly in equity strategies, and therefore tended to benefit more from the AUM perspective, he added. For example, three of the top four managers — BlackRock, SSgA and Vanguard — had $2.04 trillion, $1.38 trillion and $1.24 trillion in passive AUM, respectively.

North American managers grew 8.3%, with the U.S. managers running about half of the top 500's total assets as of Dec. 31 vs. about 42% 10 years ago. Currency movements and market performance fueled the U.S. dominance, along with global investment trends, sources said.

“If investors continue (to invest in) more global mandates and more alternatives, U.S. managers will benefit the most,” Mr. Baker said. ”The U.S. is 50% of the world in market-cap terms and it has got the preponderance of private equity and hedge funds, so there's no reason to think that's going to massively reverse. The U.K. is the other region where global mandates are managed, and in alternatives, London is the next big market for hedge funds behind the U.S.”

Schroders PLC, the fastest growing European manager among the top 50 in the past five years, climbed 24 spots to No. 45 in 2012 from No. 69 in 2007. Said Neil Walton, London-based head of the firm's U.K. institutional business development group: “We have well-established global equity capabilities, which have been a source of strong growth for us across the world. Within that, there's also a trend in which clients are beginning to take more emerging market equities risk, and we've also benefited from that.”

In the past two years, the firm has made a series of strategic deals to further diversify its business by bolstering its emerging markets and fixed-income capabilities, through a 25% stake in India's Axis Asset Management Co., Mumbai, and the acquisition of STW Fixed Income Management LLC, a U.S. manager with $11.6 billion in AUM. Earlier this year, Schroders also purchased Cazenove Capital Holding Ltd., a wealth management firm with £20.1 billion ($32.3 billion) in assets.

“In fixed income, we were looking to broaden our alpha capabilities, as opposed to low-cost beta,” Mr. Walton said. “The outlook for (fixed-income) beta is not strong if interest rates normalize.”

As a group, European manager AUM rose 12.5% in 2012. Among the overall top 20, European managers had a 36% share of the assets. Japanese managers ended 2012 down 8.7% in AUM, and none made the top 20, partly because of currency movements. In 2012, the yen dipped about 10.5% against the dollar following monetary and fiscal policies aimed at driving up inflation in Japan. The Tokyo Stock Price index returned 7.5% in U.S.-dollar terms during the same period.